Portfolio Return Charactrestics of Different Market Sectors at the Nairobi Stock Exchange

Abstract

This study compares the portfolio stock return characteristics of different market sectors at the Nairobi Stock Exchange from January 1997 to December 2001. We begin by examining the average returns of each of the stocks in the Agricultural, Commercial, Financial and Industrial market sectors, without considering the risk level of each of the stocks included in the sample. We then factor in risk dimension into the analysis, both at the individual stock and portfolio levels. The analysis of sectoral portfolio return characteristics does indicate that there are"significant differences between sectors in terms of their risk-return relationships. The portfolio return characteristics do not only differ across sectors but also from one period to the other. These differences were intermittent. The existence of these risk-return differences is a manifestation of the inherent differences in market conditions and sector characteristics. Empirical evidence suggests that stock returns across market sectors are not uniform. According to Fama and French (1992, 1996), much of the cross sectional variation in equity returns can be explained by firm characteristics such as market capitalization, price-to-earnings ratios, change in operating earnings and book-to-market ratios. They examine many of these factors simultaneously and conclude that size and book-to-market, explain the majority of the cross sectional variation in stock returns. The differences observed in our study were significant enough to influence investor choice while determining which stocks to include in the investment basket and their respective proportions.